Stockwatch Energy today
Energy Summary for Oct. 6, 2021
2021-10-06 20:26 ET - Market Summary
by Stockwatch Business Reporter
West Texas Intermediate crude for November delivery lost $1.50 to $77.43 on the New York Merc, while Brent for December lost $1.48 to $81.08 (all figures in this para U.S.). Western Canadian Select traded at a discount of $12.20 to WTI, down from a discount of $12.07. Natural gas for November lost 63 cents to $5.68. The TSX energy index lost 3.42 points to close at 149.03.
Oil prices retreated from multiyear highs as the U.S. Energy Department reported that crude inventories rose by 2.3 million barrels last week, going against analysts' expectations of a 418,000-barrel drop. In addition, the U.S. government is publicly considering a release of emergency oil reserves in a bid to prop up domestic supplies and tamp down gas prices at the pump. "It's a tool that's under consideration," said U.S. Energy Secretary Jennifer Granholm during an appearance today at the Financial Times' Energy Transition Strategies Summit. She added that the government would also consider limiting crude exports.
Here in Canada, most oil and gas stocks slid with commodity prices, but there were some exceptions. Grant Fagerheim's Whitecap Resources Inc. (WCP) fought its way up six cents to $7.32 on 9.8 million shares, after arranging a $188-million royalty sale. The royalty covers Whitecap's share of production from its 65-per-cent-owned Weyburn oil field in Saskatchewan. The buyer of the royalty is Topaz Energy Corp. (TPZ), down 57 cents to $17.18 on 1.69 million assets.
Weyburn has a long history in the oil patch. It was discovered in the 1950s and has been undergoing various EOR (enhanced oil recovery) techniques since the 1970s. In 2000, the operators -- at the time led by the majority owner, Cenovus Energy Inc. (CVE: $13.31) -- began injecting carbon dioxide as a means to help pump the oil out. This effectively turned Weyburn into a dual oil field and carbon capture/storage project. By 2008, Weyburn was the largest carbon capture/storage project in the world. In 2017, to reduce debt, Cenovus sold its Weyburn interest to Whitecap for $940-million. Whitecap has been boasting ever since that the Weyburn CO2 injections effectively offset the CO2 emissions at all of its other projects. The company is not only carbon neutral, it claims, but "carbon negative."
The royalty sale does not change any of that, or any of the field's current gross production of around 21,500 barrels a day. It simply provides Topaz with a 5-per-cent royalty on Whitecap's share of production (which is around 14,000 barrels a day). Topaz has been snatching up one royalty after another lately from companies including Tourmaline Oil Corp. (TOU: $43.54), Tamarack Valley Energy Ltd. (TVE: $3.44), Headwater Exploration Inc. (HWX: $4.54), Cenovus and now Whitecap. It is so pleased with its dealmaking that it has now announced its second dividend increase of the year. Its new quarterly dividend will be 24 cents, up from 21 cents (and before that 20 cents), for a yield of 5.6 per cent.
Whitecap is also eyeing a dividend increase. It has already raised its monthly dividend twice this year, first to 1.508 cents (from 1.425 cents) and then again to 1.625 cents. The current yield is 2.7 per cent. As part of today's announcement about the royalty sale, Whitecap said it would use the proceeds to reduce debt, thereby giving itself the near-term "potential to accelerate return of capital ... through targeted share buybacks and dividend increases."
Another Western Canadian oil producer, Paul Colborne's Surge Energy Inc. (SGY), lost six cents to $5.16 on 1.89 million shares. The drop came despite a boosterish appearance by Mr. Colborne (president and chief executive officer) this morning on BNN. He talked up the $58-million offer that Surge made on Tuesday to buy the private Fire Sky Energy. "We were the lucky winner," he cheered. He said Fire Sky serves as a "really exciting, core area top-up acquisition," coming mere weeks after Surge expanded into the area through the $160-million takeover of Astra Oil.
Both the Astra and Fire Sky deals are all-share affairs. Some analysts have expressed concern about this -- Stifel's Robert Fitzmartyn fretted about a "potential liquidity overhang" in a research note this morning -- but Mr. Colborne is unfazed. He pointed out that Astra and Fire Sky were both private, so their owners are "really patient, good, Calgary-based oil and gas people" whom Surge is eager to have as shareholders.
Moreover, Mr. Colborne implied that Surge is undervalued, as it is "trading at the lowest multiple of cash flow per share that I've ever seen in my 30 years in the business." He calculated that Surge will enjoy $225-million in cash flow next year, of which about $120-million will be free cash flow. This is getting toward a level that can "return Surge back to our value-based, returns-based investment strategy of dividends [and] share buybacks. It's exciting," declared Mr. Colborne. (Surge suspended its dividend in 2020.) Evidently, Mr. Colborne was feeling generous with his compliments this morning. He included not only Surge, but also Whitecap and Enerplus Corp. (ERF: $10.64), on his list of "good companies [that are] trading at historic low multiples of cash flow per share."
Another company working on acquisition is Doug Bartole's Alberta Cardium-focused InPlay Oil Corp. (IPO), down six cents to $1.63 on 569,600 shares. It agreed last week to buy Prairie Storm Resources Corp. (PSEC: $0.29) for $50-million in cash and shares. Some of the cash portion of the price tag will come from a planned equity financing. InPlay has now filed the prospectus for the financing on SEDAR, qualifying the issuance of 8.34 million subscription receipts (to become shares after the acquisition) at $1.20 each. That is a 26-per-cent discount to today's close of $1.63.
In smaller financing news, Don Simmons and Charlie O'Sullivan's Hemisphere Energy Corp. (HME), down two cents to 88 cents on 121,500 shares, will have just received about $645,000 from a warrant exercise. The holder of the warrants, Cibolo Energy, has filed a SEDAR report disclosing its exercise of warrants to buy 2.29 million shares at 28 cents. That price looks very favourable next to today's close of 88 cents.
The warrants go back to 2017, when Cibolo, a Texas-based energy investment firm, agreed to lend Hemisphere up to $35-million through a term loan. Warrants with a 28-cent strike price were part of the consideration. Hemisphere fully repaid and terminated the loan in July, 2021, and established a new, lower-cost credit facility with Alberta's ATB Financial. Yet Cibolo is clearly keeping an eye on the company and its ambitious production plans at its Atlee Buffalo oil project in Alberta (as discussed in the Energy Summary for Sept. 16).
Cibolo did not previously own any shares of Hemisphere. Now it owns a 2.5-per-cent equity interest, and holds enough warrants to boost this interest to 10.2 per cent if fully exercised. The warrants expire in September, 2022.
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